Table of contents
Table of contents
IR35 is definitely a tricky one to get your head around if you’re a freelancer or contractor who regularly works closely with the same clients.
At a very basic level, the trick is to ask yourself, am I an ‘employee in disguise’? Not in the literal sense – no camouflage needed. But if you do feel like one of the team, then you may fall inside IR35. Confused? Let’s start at the beginning.
We all know HMRC isn’t a fan of any loopholes when it comes to paying your taxes. But, before the introduction of IR35 in 2000, there was one huge money-saving loophole that benefited both contractors and businesses.
Known as ‘disguised employment’, it really is as sneaky as it sounds.
Like the name suggests, the contractor is pretty much an employee, but rather than actually being employed, they work through their own intermediary business instead, such as a limited company or a partnership.
Before IR35 existed, employees could walk into work employed one day, and switch to their own limited company the next. The difference? Nothing at all from the outside looking in. Except the individual can pay themselves a smaller salary and the rest in dividends, which means less tax, and more money to take home.
Generous of the employer, you’d think? Well, it benefited them too. They no longer had to deal with their employee’s taxes or make National Insurance or pension contributions as their employer. So, in some ways, it was a win-win for all! Apart from HMRC of course.
In other ways, it wasn’t so great – especially for the individual because they’d basically be an employee without rights, such as sick pay or maternity leave. This means IR35 also helps to protect workers being forced out by their employer in order to do their job in a self-employed capacity.
This can be hard to say, and lines can be blurred, so it’s usually assessed on a case-by-case basis.
Here are some examples of people who have their own limited companies that are likely to fall inside IR35.
The contractor works the same hours as the employees, has lunch with them and goes to all the company socials, all while working through their own limited company. This could be considered ok if it was for a brief period while a project is running, but if there’s no end in sight, they could be an employee in disguise!
The contractor has regular work with the client, paid on an hourly basis. Rather than working on different projects with the ability to choose what to work on and how to work, the client dictates the workload and how it should be conducted. This means the person no longer provides a ‘specialist service’ and has the same level of authority as a regular employee.
Every case is different, and HMRC will always look at the ‘whole’ picture before deciding if you’re ‘inside’ or ‘outside’ IR35.
We completely understand this is confusing, with so many insides and outsides you don’t know whether you’re coming or going. So don’t panic if you still don’t completely get it! There are a few other things which might help you understand your IR35 status.
Is your client closely managing you or do you have free reign over your work? If you’re truly self-employed you’re likely to have much more control over your working hours, pay, conditions, etc., when you become a contractor.
Could you send someone else to do your work if you needed to? Obviously an employee wouldn’t be able to do this, but you might if you’re contracting under your own company.
Is the company you’re contracting for offering you things like sick pay, holiday pay, or parental leave? If so, HMRC will probably see you as working inside IR35 rather than outside.
Are you obligated to take on more work for the client in future? Are they obligated to take you on again? If so, there’s an element of Mutuality of Obligation which means HMRC is likely to consider you employed rather than self-employed, therefore inside IR35.
Plot twist, it’s not HMRC. It starts with the person who’s contracted you. If they’re deemed a ‘small company’ then it’s your responsibility to assess whether you’re inside or outside IR35, which is known as ‘determining status.’
They’re considered to be a small company if they hit at least 2 of the 3 below:
If they’re a small company, then HMRC’s online CEST (Check Employment Status for Tax) tool will help. Just make sure you save the determination and a copy of the information you entered!
If they aren’t a small company – the pressure is off. The person who’s contracted you will complete an assessment and provide an SDS (Statement of Determination Status).
This statement confirms whether you’re ‘inside’ or ‘outside’ of IR35, and your client should constantly re-assess this throughout your working relationship.
We know IR35 affects limited companies but what about the likes of sole traders? Well, the good news is that sole traders don’t fall under IR35 legislation because it only applies to incorporated companies. But while IR35 may not apply to them, they still have to follow rules around the designation of employment. Which is basically IR35’s twin sister!
This applies to any self-employed individual that provides services to their clients, and it’s up to the client who’s hired the sole trader to determine their employment status.
Absolutely. If your client and HMRC have agreed you’re inside IR35 and you disagree, you’re entitled to put your case forward. It’s all about communicating with them effectively. After all, you’re providing them a service so you both need to work together to be on the same page.
To appeal, you can do the following:
01
Outline the parts of the IR35 determination you disagree with and send it over to your client
02
Be specific and discuss why you believe you’re outside of it. For example, you have no set hours, you charge set fees, provide a specific specialised service, etc.
03
Keep note of all your communications with your client and wait 45 days maximum for them to respond.
This case can be put forward by yourself or the agency you work with. You can find more information on the government website.
If you run your own limited company, it’s always best to ensure you have proof you’re not inside IR35 just in case you do receive a letter from HMRC.
HMRC don’t tend to send out random checks, and will normally only do so because there’s a reason to believe your company is at risk of falling inside IR35. Providing them with all the relevant documents quickly to support your case will mean they’ll close the inquiry and won’t pursue it further. If they aren’t satisfied with your documents, you may be called for a face-to-face meeting.
If your contract is found to be inside IR35, you may be confused about what this means. The most important thing to note is you’ll now have NI and tax deducted from your pay each month by your client.
This also means they must make the same contributions they would for one of their own employees.
Unfortunately, you still won’t receive the same benefits as regular employees, unless you’ve come to an agreement with your client. This includes things like annual leave, or redundancy pay. If this is something that worries you, you can sit down with your client and review your contract together.
Yes! You can have several different contracts both inside and outside IR35. All that matters is your situation has been assessed accurately and if you’re deemed ‘outside’ by a client, it’s correct. So, if you ever receive a letter from HMRC wanting to investigate your status, you’ll need to confidently provide evidence that either:
Situations like this make it very important to keep good records for IR35!
The good news is, you don’t need to close your company, even if all your contracts are inside IR35 and you don’t see yourself trading for a while. All you need to do for now, is set your company as dormant while you fulfil the projects you’re working on with your client/s.
Like being an employee on PAYE (pay-as-you-earn), your client will now deduct NI and tax before paying your invoice. Whereas before, they’d pay the invoice in full and leave the rest up to you.
If the thought of IR35 feels a little overwhelming, you could look into employment with an umbrella company. This gives you the chance to breathe and feel like a freelancer again without the constraints of being tied to one employer.
Like a limited company, you can pick and choose the clients you’d like to work with, while receiving all the benefits of being employed too. Meaning you’ll be entitled to annual leave, sick pay, and maternity or paternity leave, and so on. And the best thing about it? There’s no need to worry about IR35 because you’re technically employed.
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A creative content writer specialising across business, finance and software topics. I have a love for all things writing, and creating engaging, easy to understand content that helps everyday people!
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